Quakerton Authority Must Lend Money Soon -- Before It's Lost

The Quakertown General Authority is scrambling to preserve one of its two bond pools in an effort to maintain $10,000 in fees it receives annually.

Ralph Saggiamo, vice president of municipal bonds for Drexel Burnham Lambert, told the authority yesterday that if the $97 million in its "B" pool is not lent by March 1, the money will be lost.

The outlook on lending at least some of the money is good, according to Saggiamo.

The authority created another $100 million bond pool in 1986, known as the "A" pool. All of the money in the A pool has been lent out at variable interest rates that float with the prime rate. And because all the money has been lent, the A pool will continue over the next 20 years.

Saggiamo said that some of the borrowers in the A pool have expressed an interest in refinancing their variable rate loans at a fixed rate through the B pool.

The fixed-rate borrowing is attractive, he said, because of the current "all-time low" interest rates.

When the two bond pools were created, federal law required that they be used within three years. But because the B pool allegedly was mismanaged by a previous administrator, the deadline for using the money was extended until the pool showed a positive cash flow.

That is expected to occur within the next month, Saggiamo said.

One of the benefits that have accrued to the General Authority from the bond pools is fees that are awarded annually. Each pool pays the authority about $10,000 a year.

The money, less administrative expenses incurred by the authority, is then donated to LifeQuest Foundation -- the fund-raising arm of Quakertown Community Hospital's parent organization.

The hospital, which is a borrower from the A pool at a variable rate, is likely to take advantage of the re-financing opportunity, according to its Chief Executive Officer Michael Hammond.

"It's very attractive," he said. "There's an opportunity to lock in a good fixed rate. Seven percent tax free -- that's very, very favorable."

Hammond said he would expect the hospital to convert about 75 percent of its $13 million variable rate debt through the bond pool.

Any unlent portions of the B pool will be used to pay off bond-holders that created the money pool through the purchase of the bonds, Saggiamo said.

He cautioned the board, however, that several obstacles could arise that would make the refinancing unattractive to borrowers.

If fixed-interest rates rise significantly in the next month, he said, that would reduce or eliminate the incentive for some borrowers to switch financing.

Also, he said, if First National Bank of Chicago, the insurer of the bonds, refuses to defer some of its fees on the B pool, the incentive would be reduced.

Keeping the B pool alive is an advantage to borrowers, the hospital and the General Authority, Saggiamo said.

He conceded that it also is an advantage to Drexel Burnham, which, as administrator of the bond pools, is paid fees to market the bonds in each pool.

Saggiamo said survival of the bond pools does not affect the fees paid to American Administrative Service, a co-administrator of the bond pools. That company is owned by LifeQuest President Roger Hiser.

"Whether nobody goes into the B pool or somebody gets into the B pool," Saggiamo said, "they're not going to make more money."